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Rules Met, Goals Missed: The Compliance–Sustainability Gap

Author

Listed:
  • Carolina Ulloa-Suárez
  • Oscar M. Valencia
  • Jorge Guerra
  • Gustavo Sánchez

Abstract

This paper investigates whether compliance with fiscal rules promotes public debt sustainability. Building on an extended theoretical framework of fiscal reaction functions to incorporate the impact of compliance, and leveraging newly available crosscountry compliance data, we assess whether governments that adhere to rules adjust their primary balances more strongly in response to rising debt and benefit from lower growth-adjusted interest rates. Focusing on two regions with contrasting institutional contexts, we find five key results. First, annual compliance strengthens fiscal adjustment in the European Union (EU) but not in Latin America and the Caribbean (LAC). Second, only sustained compliance improves debt responsiveness in both regions, especially in LAC. Third, the effect varies by rule type: all categories matter in the EU, while only expenditure rules are robust in LAC. Fourth, those effects remain even with high debt levels. Finally, sustained compliance reduces growth-adjusted interest rates in both regions, easing fiscal constraints. These findings suggest that compliance alone is not sufficient—its effectiveness depends on credibility, institutional setting, and persistence over time.

Suggested Citation

  • Carolina Ulloa-Suárez & Oscar M. Valencia & Jorge Guerra & Gustavo Sánchez, 2025. "Rules Met, Goals Missed: The Compliance–Sustainability Gap," Working Papers of BETA 2025-23, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2025-23
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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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